A new report from market analysts, RepuTex, indicate the main policy alternative to Australia’s current carbon price, the conservative Liberal-National government’s Emissions Reduction Fund (ERF) may fall short of Australia’s 2020 emissions reduction goal.
The RepuTex analysis indicates that the proposed ERF will be undersupplied when it commences in July, with the government facing a shortfall of as much as 300 million tonnes to meet its five per cent emissions reduction target by 2020.
The report is the first to forecast industry participation in the ERF following the release of the government’s draft legislation and the federal budget.
The analysis also projects the likely price of abatement to be paid by the government to companies that reduce emissions.
Analysis indicates that by 2020 the ERF is forecast to purchase between 30 and 120 million Australian Carbon Credit Units (ACCUs), leaving a shortfall of over 300 million tonnes in order to meet Australia’s five per cent emissions reduction target.
That is equivalent to more than 70 per cent of the government’s total abatement challenge.
Two thirds of all credits purchased by the ERF are expected to come from high emitting companies, with the balance supplied by existing proponents operating under the Carbon Farming Initiative.
According to RepuTex, industry participation in the scheme will be highly dependent on the price of abatement purchased by the government.
The benchmark price, the maximum price that can be successful at an auction, will be set by the Clean Energy Regulator prior to the first auction, and will be keenly observed by the market.
“The benchmark price set by the Regulator will be critical in determining the success of the Emissions Reduction Fund as it will directly affect companies’ investment decisions to reduce emissions” said RepuTex Executive Director, Hugh Grossman.
“Should the Regulator set a high benchmark price of $20-30 we forecast that the market will respond favourably, with up to 11 million Australian Carbon Credit Units (ACCUs) purchased in year one.
“This could fall to just three million ACCUs should the Regulator elect to cap prices at only $10” said Mr Grossman.
The Australian market requires an average of 70 million tonnes of abatement each year from 2015 to 2020 in order to meet its cumulative abatement challenge of 421 million tonnes, equivalent to a five per cent reduction in emissions from 2000 levels.
While high benchmark prices may encourage greater industry participation, RepuTex analysis indicates that the Australian abatement market will continue to be undersupplied.
This will leave a shortfall of over 300 million tonnes against Australia’s Kyoto Protocol obligations, equivalent to more than 70 per cent of Australia’s total abatement challenge.
“While high benchmark prices could result in around four times the amount of abatement from industry compared to a low purchase price, the ERF alone is likely to fall short of purchasing enough emissions abatement to meet Australia’s Kyoto obligations” said Mr Grossman.
“Even buoyed by a very high benchmark price we forecast that the ERF would purchase less than 120 million tonnes of greenhouse gas emissions abatement by 2020, equivalent to only 28 per cent of Australia’s abatement challenge.
“This leaves a considerable shortfall for the government to overcome in the final design of its scheme” said Mr Grossman.
The final design of the coalition’s climate policy is expected to be completed by March 2015 when the government releases the details of its proposed safeguard mechanism, which will introduce baselines and flexible penalties for facilities, to commence on July 1, 2015.
This component of the scheme has been separated from the main ERF legislation, which is expected to be tabled in Parliament over the next fortnight as the Liberal-National government seeks to meet its July start date.
According to RepuTex, the ongoing design of the Direct Action Plan will buy the government time to address any environmental shortcomings.
“The government has flexibility in how it will ultimately deal with this shortfall, including the ability to set more stringent baselines, to introduce an emissions cap or top-up its ERF funding in subsequent years” said Mr Grossman.
“How key independents such as Senators Madigan and Xenophon, along with the Palmer United Party work with the government on the final design of the scheme will ultimately determine the success of the Direct Action Plan in meeting Australia’s five per cent target”
“While some doubt remains over the design of the safeguard mechanism, at this point it appears that the government will have the power to implement its ERF by July” he said.
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